JD.com: "Focus, Efficiency, 3P Sellers", the Keywords of 2023

Below is the summary of the conference call for JD's 1Q23 performance. For corresponding financial report analysis, please refer to "Is the Hundred Billion Subsidy Just Empty Talk? JD is Still Stuck in the Same Pit".

I. Management Statement

Since 2023, the macro economy and consumer demand have been in a recovery climbing period, but the endogenous power is still insufficient, and the consumer demand is still insufficient. Different categories have also shown different recovery trends. JD actively embraces the new external environment and industry development trend in the post-epidemic era. 2023 is a year for JD to make proactive adjustments for long-term development. Here, I will summarize some of the main adjustment measures and progress made, which mainly consist of three aspects.

First, focus on the main business channel. Since last year, we have made a series of supply-side adjustments around the concept of achieving long-term healthy and sustainable growth, comprehensively sorted out and optimized the business structure including category combination and channel layout, and focused on improving business operation efficiency and quality. At the same time, we need to regularly sort out innovative projects in each business segment and focus resources on those businesses that can create long-term value.

With the overall improvement of business health, the profitability level of JD's overall and core businesses has been further improved, and the historical best profitability level in the first quarter has been created. Core categories such as home appliances, furniture, 3C, digital, and challenging categories such as wine and baby products have further consolidated and expanded their market leading positions and market shares. Especially since the second quarter, with the gradual recovery of consumption, this trend has become more obvious.

Second, improve management and operational efficiency. In core business segments such as retail and logistics, we have made organizational structure adjustments, including streamlining management levels, creating a flat, agile, and efficient management framework structure, and further authorizing more frontline business units. After the organizational structure adjustment, there are at most three reporting levels from ordinary employees to the CEO in the sales and marketing business.

Among companies of similar size in the industry, JD's organizational structure will be the flattest. The new organizational structure gives business units closest to the market and users greater business decision-making power, stimulates the vitality of each business unit, and allows young managers to have greater development opportunities. Agile and efficient organization is also a prerequisite and driving force for JD to embrace the post-epidemic era and create rapid growth again.

Third, further prosper the third-party platform ecosystem and improve user experience. JD's core business philosophy has always been centered on users, based on continuous optimization of costs and efficiency, to create the ultimate product prices and service experience. Around the brand awareness of "Duokan Haosheng", to meet the needs of users.

Both self-operated and platform models are ways we serve users. This year's goal is to further build a rich platform ecosystem, and strive to introduce merchants, especially a large number of high-quality small and medium-sized merchants with relatively small proportions. Since the launch of the Chunxiao plan to support new merchants at the beginning of this year, JD has accelerated the expansion and sales of new merchants on the open ecosystem, and the number of third-party stores has increased by more than 20% compared to Q4 last year, with the number of merchants in the fashion, home, and supermarket categories growing rapidly. On JD's platform, merchants are very active in investing resources, and JD's low fund cost still has advantages and relatively higher efficiency.

On the user side, we have observed healthy growth in user traffic on the main site, with DAU continuing to achieve double-digit YoY growth in March. At the same time, the scale of repeat customers and paid members in the retail business in the first quarter achieved rapid YoY growth of nearly 20% and 30%, respectively, with the proportion continuing to increase, driving the overall increase in user shopping frequency. Among them, the scale of JD Plus members reached 35 million at the end of the first quarter, and the annual consumption level of Plus members remained 8.4 times that of non-Plus users, continuing the high activity and high consumption power.

It is also worth sharing that the scale and growth of our active sinking users for more than a year have achieved steady growth, and have been accelerating month by month from the beginning of this year to April. At the same time, with the orderly promotion of our everyday low price strategy, we are also pleased to see that the NPS score of the JD APP continued to increase in March. We believe that with our continuous construction of supply-side capabilities, improvement of user services and operations, JD has the ability to meet the needs of more new users while fully guaranteeing the core user experience, and the ceiling for user growth is still high.

Q&A

Q1: How to consider the logic and impact of the recent internal architecture adjustment?

A1: JD Retail and JD Logistics have successively carried out similar organizational structure adjustments. Taking JD Retail as an example, the main thing is to cancel a level of business group and change it to a business unit. The head of the original business group will serve as the head of the business unit, and the various business units under the business group that manage many sub-categories of goods will be split into operational units according to specific categories.

The rights and responsibilities of each operational unit will also undergo significant changes, with greater decision-making and business management powers, and stronger ties between the performance assessment of each operational unit and its own performance. The purpose is to further stimulate the entrepreneurial spirit of front-line teams and make the interests of the team and investors more consistent.

Our strategic direction will not actually change, and it will remain consistent for a considerable period of time. I will also continue to implement JD's business philosophy of cost, efficiency, product, price, and service with our management team.

We will also continue to deepen the group's strategy, focus on sinking markets, focus on the ecology of our third-party merchants, and real-time retail. These are also important drivers for the long-term growth of our core business. At the same time, we will maintain the long-term healthy growth of our profits through continued scale operations, continuous improvement of operational efficiency, and diversification of revenue structure.

Q2: What is the effect of the low-price strategy, including the billion-yuan subsidy, on user growth, merchant participation, and GMV growth since its implementation?

A2: The billion-yuan subsidy includes cheap postage, flash sales, and other forms and actions that allow consumers to have a clear perception of user experience and price strategy. We also want to emphasize that in building JD's overall user mindset of everyday low prices, low prices are the ultimate result and experience we deliver to users. These are actually based on our continuous accumulation and investment in the supply chain for a long time. Actually, what we get in return is higher efficiency and lower cost advantages.

On the supply side, we will continuously improve our open ecosystem, providing richer prices, richer categories and products, including branded and white-label products, to consumers at different levels. We will also continue to release economies of scale through our own supply chain advantages, and pass on the savings of additional operating efficiency to consumers. Therefore, based on the foundation of JD's everyday low price, our EDLC (every day low cost) cost will be even lower.

This year, we have made many changes in user experience. We hope to gradually guide users to change their shopping habits through adjusting our marketing strategy, from hoarding during big promotions to recognizing our everyday low price business philosophy, to drive up daily sales, which used to have a relatively low proportion. Therefore, we expect that the proportion of daily sales will increase throughout the year, returning to the essence of retail, and making the entire industry's supply chain run more smoothly, helping our partners, brand merchants, and third-party merchants to improve operating efficiency and create greater value.

Since the launch of JD's 10 billion subsidy, it has generally achieved the expected results. With joint marketing efforts from us and brand merchants, consumers feel real discounts. Only by truly benefiting users can we attract more brand merchants and merchants to participate in this marketing activity. We have also seen improvements in user traffic, activity, and repurchase behavior, and the number of active POP merchants has also significantly increased. Therefore, overall, we will control the overall impact and control the impact on financial reports and profits.

Q3: After integrating the KPIs of self-operated and 3P, how has the growth recovered from the GMV perspective since the first quarter?

A3: Since entering the second quarter, we have seen that the growth rate of the entire GMV has accelerated compared to the first quarter, and the growth rate of GMV is faster than that of revenue. The driving force is actually the continuous growth of the number of active and selling 3P merchants, so the growth rate of 3P GMV will also be faster than that of 1P self-operated.

There is also the impact caused by the relatively low base of 3P business last year. In addition to the increase in the number of merchants, we have also made a series of algorithm and technology optimizations, including adjustments to traffic distribution mechanisms, platform operations, and new low-price mindset marketing activities, which have gradually brought more positive effects to the 3P ecosystem. In addition, regarding organizational changes, various details are still being implemented, and the specific impact is estimated to take some time to be released.

As for our 1P business, whether it is the self-operated model of 1P or the third-party merchant model of 3P, they are actually different ways of serving users. Ultimately, we should hand over this decision-making power to users, not ourselves. Therefore, our unique advantage is that our 1P and 3P business models can complement each other, which has been fully verified and successful in other markets. We actually have strong competitiveness in many categories in our self-operated business, which is also our deepest moat. For example, consumers with relatively high unit prices need guarantees of higher product quality and service levels. Moreover, this self-operated business can bring better economies of scale, lower costs, and higher efficiency, which naturally makes these products more suitable for 1P. At the same time, as JD.com's consumers and shopping needs become more diverse, their differentiation will also become greater. Therefore, we also need to enrich our supply side through the 3P model, so that users have more and richer product choices.

So this organizational restructuring, in addition to a team structure that connects 1P and 3P, has also made some adjustments to the performance assessment goals to make everyone's interests more consistent. In fact, in the end, it will all form a user-centric approach to let users choose which mode is the best and most suitable.

In the short term, the adjustment of business may indeed affect our revenue growth rate to a certain extent, especially for some categories, such as the impact on the supermarket category will be more obvious.

But we believe that after a period of time, all our categories will return to a healthier growth trend. In the long run, we also believe that the supermarket category is still the most important growth driver for JD.com.

Q4: How is the recovery of consumption in April and May, especially the demand for consumer electronics and home appliances? How to look forward to the strong recovery of these two categories?

A4: Indeed, the entire home appliance and home furnishings category, including this kind of consumer goods, is still greatly affected by the current consumption demand and real estate. Our view is that the consumption of this kind of consumer goods in the entire home appliance and home furnishings category still lags behind the offline contact market consumption that everyone can see. So it may still take some time to recover.

The good news is that through our multi-channel construction in the past few years, we are far ahead of the industry in the field of home appliances, and we believe that with the recovery of the economy and the industry in the next few quarters, we should be able to rebound quickly. In recent years, we have established some advantages in products, experience, and multi-channel, so we still have great confidence in this.

3C digital products are actually similar to home appliances. In the current unstable economic situation, this durable, high-unit-price category actually has a relatively slow consumption recovery rate. But it is also similar to home appliances. This is JD.com's strong user awareness, and we have also operated it for many years. In recent years, we have made a lot of innovations in service and multi-channel.

Whether it is home appliances or 3C digital products, in the first quarter and the data we saw in April (the growth rate in April is gradually warming up), our market share in the industry is constantly increasing, but the two categories still need some time to wait for the consumption rebound. After the manufacturers' confidence in the future increases, we will also rebound more quickly. Q5: What is the strategy for next month's 618?

A5: This year marks the 20th anniversary of JD.com, which is very important to us. So this year, we will continue to strengthen our cooperation with brand merchants and sellers for the entire 618 promotion, which is the first point.

The second point is that many brand merchants and sellers in many categories are under great business and inventory pressure, and we will also make good use of this year's 618 promotion. At the same time, we will make some adjustments in marketing and operational methods. Therefore, we believe that this year's innovation and cooperation with brands and sellers will create a new height.

Q6: How will JD.com cooperate with categories such as 3C digital products with high inventory levels to stimulate consumer purchasing during the upcoming 618 promotion? Will competition in this category intensify? Or has JD.com encountered more competition resistance in fast-moving consumer goods? What is JD.com's next growth story?

A6: Overall consumption may remain cautious, especially for large products such as 3C home appliances. However, we have heard from brand merchants that all OEM manufacturers are very willing to provide attractive rebates or discounts to promote sales and try to sell existing inventory in preparation for new models to be released in the second half of the year. If this is true, then JD.com will have a good opportunity because our relationship with brands is stronger and our supply chain capabilities are stronger. We have also heard that especially for home appliance brands, they hope that this year's sales will have positive growth.

In terms of competition, I would say that our competitive advantage is very different from other competitors. Again, we are a supply chain-driven platform, not a traffic-driven platform. Therefore, although we face some short-term challenges due to our active business adjustments or active channel or product structure adjustments, I can see that the profit margin of many of our product categories is still increasing. This means that we will continue to improve operational efficiency while setting competitive prices in front of consumers. So healthy business is still growing, and I am confident that after all the business adjustments or absorptions are completed this year, we will return to normal growth trends.

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